Recent Posts

In most countries, it would be an act of mind-bending chutzpah,
or perhaps a display of political insanity, but in Italy it
barely made ripples: for a government official, a minister no
less, to declare that the country cannot pay its long overdue
bills, and not for a month or two, but for the rest of this year!
Due to "technical" problems.

The Italian government is out of money. Not that the US
government is in any better shape in that respect, or the
Japanese government for that matter, but they have central banks
that print the missing moolah with lavish abandon. Italy doesn't.
It has the ECB which is run by an Italian who promised last year
to print with lavish abandon to keep countries like Italy afloat.
But that promise is not the same thing as having your own central
bank.

On July 4, Italy's budget fiasco came to light once again. Wracked by the
pretense of austerity, expenditures rose 1.3% in the
first quarter, while revenues remained flat. So the deficit rose
to 7.3% of GDP, up from 6.6% last year, bringing the national
debt to 130% of GDP. Ballooning debt and deficits in a shriveling
economy – Italy has been in recession since the fourth quarter of
2011 – is a toxic combination in the Eurozone.

How will Italy force its deficit under 3% of GDP, the line in the
sand that would trigger the Eurozone’s excessive deficit
procedure? The government is desperately trying. Economy Minister
Fabrizio Saccomanni announced that he’d identified a1,600 “unused”
properties that could be dumped. In the near term, this could
haul in about €600 million, he said, though former Prime Minister
Mario Monti's plan to do that had run aground on the reefs of the
declining property market.

In any case, despite appearances to the contrary, "the trend of
public finances in the first half is consistent with the
achievement of a net deficit of 2.9%," he said. But €600 million,
if they materialize, would be a drop in the rusty Italian budget
bucket. Much more would be needed.

Hence, a eurocratic deus ex machina: José Manuel Barroso,
president of the European Commission, told the European
Parliament on Wednesday that the budget rules would be
reinterpreted for 2014 so that some public spending on
infrastructure projects could be excluded from the deficit
figures – something Italy has long pushed for in its valiant
efforts to keep its deficit under 3%. If all else fails, monkey
with the rules. Abracadabra.

“For countries with high levels of public debt,” such as Italy,
“this will be of limited use in the short term,” an EU official
cautioned to appease any remaining Germanic
deficit hawks. But these kinds of details didn't stop Italian
Prime Minister Enrico Letta from declaring victory. “We made it!” he tweeted triumphantly. It would
give “more flexibility in coming budgets for countries like
Italy” that had their “accounts in order.”

What exactly he meant with “accounts in order,” given Italy’s
deficit and debt spiral, remains a mystery – particularly in
light of the fact that it cannot even pay its past-due bills.

Beppe Grillo, leader of the opposition 5-Star Movement, has long
hammered on this point. In April, during the post-election
interregnum, he’d clamored for “the immediate payment of about €120
billion” that the government and public entities owed the private
sector.

The government’s refusal to pay its suppliers violates EU rules.
But the EU has soft-pedaled the issue, for two very big
reasons: payment of arrears would force Italy to sell a truckload
of bonds when there might not be any demand; and it would push
the deficit way beyond the 3% line in the sand. Thanks to cash
accounting, only actual disbursements make it into the deficit
figure. Italy has achieved its “austerity” goals by not paying
its suppliers. Once again, abracadabra.

But it’s strangling businesses. So, paying a portion of those
past-dues, namely €40 billion, has been kicked around. Most
recently, Renato Brunetta, leader of the House and member of
Silvio Berlusconi’s PDL party, demanded at a coalition meeting
that payment be made by the end of the year. In a surrealist show
of noble governance, Letta himself jumped into the fray and
committed to pay those debts even faster – not in July or August,
but sometime in the fall! Rousing applause!

"I would love to" pay the past-due debt of the Public
Administration by 2013, "but I don’t know if it can be done,"
retorted Economic Development Minister Flavio
Zanonato the next morning. "It's not ill will, but there is a
technical problem,” he said. “The government has removed the
obstacle; now all the various sources of expenditure must take
action to pay." They don’t have the money, apparently. To say
that it’s difficult to pay the debts of the Public Administration
is "obvious and true," he conceded.

It would normally be an admission of default. But not for the
Italian government. For them, it’s just another illustration of a
budget absurdity: staying by hook or crook on this side of the 3%
line in the sand – even if it strangles companies and the economy
and makes the deficit and debt spiral worse.

Italy has become legendary about tax evasion, which is part of
its budget absurdity. So now the G-8 wants to crack down. The
first four items at the recent meeting dealt with the need for
governments to share information to “fight the scourge of tax
evasion.” If only their primary targets were multinationals,
banks, and hedge funds. But they’re going after the little guy.
Read.... Beware, the Borderless Taxman Cometh